A Conversation with: Paul Henry

Fiduciary Impact

by Carolyn Ellis

Ms. Ellis is Features Editor for Advisor Magazine. Connect with her by e-mail: cellis@lifehealth.com

Paul Henry, managing director of LIMRA LOMA’s Secure Retirement Institute, leads the organization’s efforts to serve members active in the retirement market through research, compliance, training and consulting services.

We spoke with Henry about DOL’s new Fiduciary Rule which will go into effect in April 2017 and promises, in Henry’s estimation, to be transformational.

Advisor Mag: What is the new DOL Fiduciary Rule?
PH: In April 2016, the Department of Labor (DOL) published a final Fiduciary Rule that will go into effect in April 2017. It’s very far-reaching, as it impacts all assets that were accumulated in a defined contribution plan, such as a 401(k). When an advisor gives advice with respect to those assets, he or she will be held to a fiduciary standard. This is a very significant segment of financial assets held in the U.S. We see substantial outflows from defined contribution plans into IRAs every year and that amount is growing. That’s why we believe this to be a transformational event.

Advisor Mag: What does it mean to be a fiduciary?
PH: This concept which originated in trust law means that the advice-giver always has to put clients’ interests first. It’s a standard of care that includes prudence and loyalty. These concepts aren’t new, but they are packaged in this rule in a very effective way. It will be important for financial services firms and individuals who represent them to understand what it means to be a fiduciary and to act accordingly.

Advisor Mag: For whom will this be a new approach?
PH: Every sales professional that interacts with a client in an advice-giving context, including registered representatives, insurance agents, IAR’s who work for registered investment advisory firms, and even contact center personnel are affected.

If you’re talking to a client, making a recommendation, giving advice and you’re doing that for a fee and the advice concerns this client’s retirement assets coming from a qualified plan, the rule impacts you. Some have said that registered investment advisor representatives won’t be as impacted and that’s likely true, but they will be affected because as more agents and advisors move to a fee compensation model, there will be more competition.

Advisor Mag: What are the top three opportunities or challenges that come with this new rule?
PH: It’s hard to reduce them to a top ten! Dramatic changes to an industry, whether through technology, regulation, or changing demographics can have far-reaching consequences. With this new set of rules there will be winners and losers. There are firms whose product suite, compensation models, and attention to customer experience position them very well. Among the winners will also be those who can adapt quickly, have devoted resources to understand the rule and its implications, and will alter their business model accordingly. We also think there could be new entrants to the market.
As we are a for-profit, private sector industry, we may also see downward pressure on margins. Firms will need to become more efficient. We won’t see firms or individual reps do something that’s a sideline; they will be all in or all out.

Advisor Mag: How is LIMRA LOMA responding to the new rule to assist members?
PH: Our primary benefit to membership at Secure Retirement Institute is credible research that business strategists can use to frame issues and make good decisions. Equally important, we create safe forums for the industry to discuss issues and best practices. We’re very sensitive to anti-trust considerations, and for 100 years we’ve provided safe forums with professional moderators that help participants focus on an issue or a trend and individually figure out how to respond.

If you’re talking to a client... the rule impacts you

We also help educate the industry. Looking ahead to April 2017, firms are concerned about what their employees need to understand. We’ve recently introduced an online course, DOL Fiduciary Basics for Employees, a 60-minute program that’s modular and brings the new rule to layman’s level.

Firms need to continue conducting business and don’t want their people confused or scared. This course can exist alongside a firm’s own training program, but it’s built to industry specifications so companies can feel confident that they’re giving employees the right, unbiased information in an easy-to-understand format.

Advisor Mag: Are there other offerings that could be useful?
PH: Recently we launched the Fellow, Secure Retirement Institute (FSRI) professional development curriculum that leads to a Fellow designation. It teaches retirement products and markets from the perspective of an investor, advisor or agent, and financial services firm. We’ve had over 7,000 courses taken. People in operations, IT, and client services particularly value the course because it gives context for the job they do.

Advisor Mag: Have there been any push-backs to the new rule from the industry?
PH: A number of lawsuits have been filed in various jurisdictions, but LIMRA LOMA’s role isn’t to get involved in litigation or advocacy of rules or legislation. It’s hard to say there’s an industry position because there’s a broad spectrum in financial services; mutual fund companies, insurance carriers, banks, broker/dealers, retirement plan services providers each have different perspectives.

Advisor Mag: Why is this rule coming out of the Department of Labor?
PH: That’s a jurisdiction question and the subject of one of the lawsuits. DOL has jurisdiction of ERISA, so in the department’s opinion that’s why they would be able to handle anything in the qualified assets area. We’ll see whether or not the judicial branch will agree.

Advisor Mag: Has anything equivalently earth-shattering hit the industry before?
PH: I don’t think so. We’ve had significant compliance exercises in the past. We’ve had events like Y2K. Several years ago, a section of the not-for-profit market was subject to ERISA and it hadn’t been previously.

However, I don’t think we’ve ever seen a regulation or any other development that has this impact. This is not just compliance; it’s a transformational event.

Something of this order of magnitude happened in another venue. When the U.K. introduced regulatory reform through the Retail Distribution Review or RDR, there were consequences. Rules introduced in the U.K. were different from what DOL has proposed, but we know that as an immediate consequence there was a guidance gap, meaning investors with smaller accounts weren’t able to access the professional advice they had before.

Advisor Mag: So we might see that here?
PH: In our own research we’ve had members of the advisory community and their firms indicate that it will be challenging for them to service low balance accounts.

Advisor Mag: Will clients be able to sign a waiver?
PH: No, the rule mandates that if advice is being given for a fee and the advice concerns qualified assets that originated in the defined contribution plan, you have to operate according to the fiduciary standard. You can’t receive variable compensation unless you enter into a prohibited transaction exemption such as the Best Interest Contract and consumers cannot not waive their rights.

Advisor Mag: Paint a picture of the future under the DOL Fiduciary Rule.
PH: The new normal will largely mandate a more consultative approach to selling as opposed to the transactional approach. It will mandate better discovery on the part of the advisor and much more significant documentation. One possible consequence is that planning will become more valued as part of what the advisor brings to the table.◊